Zillow CEO, Spencer Rascoff, recently sold his Seattle home for just over $1 million. That’s all well and good (especially when you consider he wasn’t even living in the house at the time), except that it’s 40% under the Zillow Zestimate (which was $1.75 million at the time).
As a real estate professional, can you imagine selling any of your properties for 40% less than the claimed value? Probably not.
Needless to say, a lot of property investors and homebuyers are upset by this lack of consistency. But as the company explains on their website, the tool isn’t 100% accurate. It’s only meant to be used just as a starting point for valuation discussions.
In other words: calculators are great, but they’re not foolproof—no matter how well they’re built.
Regardless, at some point in your management career, you may need to determine the value of your rental properties. There are a few ways to do this, and a lot of online calculators available to determine the value of a property. Regardless of the tool you use (Zestimate or another), there are a few ways to find the most accurate number.
Start with comps in your neighborhood, and then calculate the price per square foot. This is true whether you’re selling a single-family home or a multi-family property.
Then, you’ll need to know how much rental income the property can potentially take in on a monthly and annual basis. There are a few ways to use this number to determine the value of your property, including:
- Gross Rental Multiplier (GRM), which compares the property’s value to its rental income potential in relation to how long it would take monthly rent to pay off the property. A $600,000 property that takes in $6,000 in monthly rent would pay for itself in 100 months.
- Capitalization Rate (or Cap Rate), which is the ratio of the net operating income of the property compared to the original investment cost (the purchase price, for example). If you bought an $800,000 property and it produced $200,000 in net income every year, the ratio would be 25%.
Whether you’re just venturing into property investments, or you’re trying to sell a property, it’s important to know the valuation of your portfolio. And the lesson we can learn from this Zestimate debacle is that you shouldn’t just trust one tool. In fact, according to experts, this is a perfect case of man being better than a machine.
The moral of the story: start with an estimate tool, do the math yourself, and check-double-check it before buying or selling.
How do you double check your investment valuations? Get the conversation started in the comments below.Read more on Scaling